The Israeli real estate market has been recording dramatic price increases for just over a decade. This is a relatively short time frame compared to price increases of such magnitude. For example, according to the housing price index published by the Israeli Central Bureau of Statistics, housing prices increased last year by a cumulative rate of about 15.2%. In other words, if the price of an average apartment in Israel was around 1.081 million ILS in 2010, in 2020 the average price has risen to around 1.58 million ILS. Due to the pace of population growth in Israel, a relatively small country, there is a constant demand for housing, mainly in the central Dan region. As a result, housing prices are particularly high.
These price increases certainly make Israeli real estate attractive, but they also make every transaction more meaningful. Therefore, it is imperative that buyers not only find the right property for them, but also gain an understanding of the stages of buying real estate in Israel, Israeli real estate laws and the most important aspects of real estate transactions. in Israel.
Real estate taxation in Israel
When buying or selling a residential apartment in Israel, two main types of taxes apply: betterment tax (also known as capital gains tax) and purchase tax. Unless the parties agree otherwise, the buyer of the apartment pays the purchase tax, while the seller of the apartment pays the capital gains tax.
The purchase tax rate that applies to the buyer during a real estate transaction depends, among other things, on the number of apartments he owns at the time of purchase. If this is their only apartment in Israel, the buyer will be granted exemption up to the price range specified in the Real Estate Tax Regulations. Above this price, the purchaser will pay a decreasing tax according to that defined by the regulations. If the purchaser owns more than one apartment, he then has no right to this advantage and will pay a higher rate of property tax according to that provided for by the regulations.
Taxation of Israeli residents versus foreign residents
As mentioned, if the apartment purchased is the buyer’s only apartment and he is a resident of Israel, he can benefit from the exemption and the lower tax brackets. On the other hand, if the apartment purchased is the only apartment of the buyer and he is a foreign resident, then he is not entitled to the exemption or reduction of the purchase tax. He will therefore pay the purchase tax in the tax brackets applicable to the purchase of a second apartment.
To date, there are two purchase tax brackets that apply to foreign resident buyers of an apartment in Israel. A purchase tax of 8% will apply to the portion of the purchase price up to 5,525,070 ILS and a purchase tax of 10% will apply to any sum exceeding the first 5,525,070 ILS.
Steps to Buying Property in Israel
- Search for a property. Naturally, the first step is to find the right property. For the most part, foreign residents tend to prefer location and proximity to the sea over proximity to good schools. The most effective way to find a property is to speak to a real estate agent. Before engaging with a real estate agent, it is important to ensure that he has a valid real estate brokerage license and is fluent in English. As for the timing of payment of the realtor’s fee, the buyer must pay it shortly after signing the contract, and not on the date of delivery of taking possession of the apartment.
- Engage with an Israeli lawyer for representation during the sale transaction. Buying an apartment involves many steps and requires professionalism and attention to detail. This is especially true when the buyer is a foreign resident making a purchase remotely. Additionally, the process for a foreign resident to purchase property differs from the process applicable to Israeli residents. Therefore, it is important to engage with an Israeli lawyer who has expertise in this area and experience working with foreign clients. The power of attorney that the buyer issues to an Israeli lawyer empowers that lawyer to assume responsibility for managing all stages of the transaction. This includes from the negotiation stage to the final stage of registering the property under the buyer’s name in the Israel Land Registry. The buyer can decide whether he personally travels to Israel to sign the documents requiring certification during the transaction, or whether he authorizes his lawyer to do so on his behalf. If the buyer chooses to mandate his lawyer to act on his behalf, the buyer must sign specific documents with a consulate or a notarial office. He must also obtain an apostille certification which legally validates these documents.
If you are buying an apartment “on paper” from a contractor, it is extremely important to retain professionals during the negotiation phase. They will advise you on apartment specifications, planning and how to make changes to suit your needs. If you buy a second-hand apartment, it is important to call on professionals to carry out preliminary inspections. These include identifying gaps in the apartment and its various systems, reviewing renovation needs, measuring the land, checking construction gaps, and more.
- Open a bank account or trust account in Israel. The only way to pay a purchase tax bill for a property is through the buyer’s bank account. Therefore, it is very important to open a bank account in Israel. Since the opening of a bank account by a foreign resident is a long process, you should start this process early and before signing the purchase contract.
- Closing of the transaction. The final step in closing the transaction is handing over the property against payment of the purchase price and reporting the transaction to the Property Tax Authority. Buyers generally do not pay the purchase price in one installment. Lawyers design payment mechanisms and pay in instalments to both move the deal forward and ensure the seller meets their obligations. For the most part, the attorney representing the buyer divides the total payment for the property into several stages and makes each payment contingent on the seller fulfilling a particular obligation. Consideration clauses are essential in the agreement. This is especially true when a foreign resident makes the purchase transaction, as it is not a standard transaction.
- Pay taxes. Another key part of a real estate transaction is the payment of taxes. The purchase tax is the main tax imposed on the buyer of real estate in Israel. This tax varies for Israeli citizens, foreign residents, new immigrants, returning residents, etc., depending on the number of properties they own in Israel. Therefore, it is very important to understand which definition is most applicable and beneficial to you, and then report that definition to the Property Tax Authority. Additionally, you must ensure that all the details you report are accurate and that you do not omit any details when reporting the transaction. For example, if the buyer tells the Real Estate Tax Authority that he only has one apartment in Israel, but owns several, he risks criminal penalties and fines. The buyer must pay the purchase tax no later than 60 days after the date of signing the contract.
- After purchase. Once the transaction is complete, it is important to obtain an insurance policy covering third party, plumbing and structural damage. It is also important to issue a perpetual power of attorney for the management of the bank account and the apartment in case of loss of legal capacity. You must also write a will that deals only with the transmission of properties in Israel.